Taking climate into account: What CFOs need to know about climate reporting

This is the first in a series of four articles from CDP, the founder and driver of climate disclosure. CEO Paul Simpson addresses what CFOs will need to know after Mark Carney and Michael Bloomberg’s climate task force reports to the G20 in July

Climate change is one of the corporate sector’s most significant emerging risks, yet remains one of the most misunderstood.

That is why alongside the Paris Agreement to maintain global temperature rises below 2° C, a private sector task force led by financial heavyweights Mark Carney and Michael Bloomberg was set up to improve global climate reporting. The Task Force on Climate-related Financial Disclosures (TCFD) is now preparing for its final report this July and will recommend that all companies disclose climate-related financial information together with their mainstream financial filings. Thus the details of TCFD’s recommendations are likely to have a big impact on the work for finance directors in the years to come.

Building off our work over the last 15 years with companies, investors and cities, the TCFD has developed four widely adoptable recommendations?on climate-related financial disclosures that are applicable?across?sectors and jurisdictions: governance, strategy, risk management and metrics and targets. This article deals with the first of those four: governance.

Climate competent governance

Among 11 initial recommendations, the TCFD’s very first is for a company to disclose governance details of how its Board oversees climate risks and opportunities, and how executives manage this on a day-to-day basis.

The first part of this means that companies may soon have to show how their Board competently supervises climate-related issues with a focus on:

• The processes and frequency that the Board or its committees are informed about climate-related issues;
• Whether the Board or its committees take climate into consideration when setting and reviewing strategy, risk management policies, annual budgets, corporate performance objectives, acquisitions and divestments and major capital expenditures
• How the Board monitors and overseas progress against climate-related goals and targets.

The second part of TCFD’s governance recommendations highlight the need for companies to report on management’s role in?assessing and managing?climate-related risks and opportunities. The key areas for finance-decision makers are:

• Whether the company has assigned climate-related responsibilities to management-level positions and who is managing which areas;
• A description of the associated organisational structures;
• Processes by which management is informed about climate-related issues
• How management monitors financially material climate-related issues.

Making things simpler

At several workshops around the world on climate reporting throughout 2017, many of the CFOs we have spoken to are concerned that the TCFD recommendations will add to their reporting burden. However, the intention is the exact opposite.

The aim of TCFD is to create a common framework for climate disclosure globally and inform evolving regulatory demands. This should mean valuable efficiency gains for CFOs and their teams. Indeed CDP has committed to adopting TCFD recommendations in their entirety within our disclosure platform for 2018.

Start of the journey

For most companies, the TCFD recommendations will likely mark the start of a journey. We will continue to work with companies to drive forward disclosure so boards can make better decisions about climate risks and opportunities. We are also encouraging the G20 to look at mandating regulatory disclosure as a next step.

Even many companies identified as leaders on climate reporting still have some way to go. For example, Graeme Pitkethly, vice-chair of the TCFD and CFO of Unilever, recently explained that although Unilever has a transparent management structure for climate with clear Board oversight, they do not currently use methods such as scenario analysis.

At CDP we will continue to drive innovation around scenario analysis, carbon pricing and target setting to drive better governance and a well below 2° C world. CFOs can help ensure that their business is ideally placed to respond and benefit from the low carbon transition.

Paul Simpson is the CEO at CDP.